Characteristics of a sustainable business model
Over the last year a new term has been rising up – the sustainable business model. So far it has been used to signal the need to go beyond innovating products or services, and change the fundamentals of how a business makes money. At Forum for the Future we are trying to work through the detail of what makes a sustainable business model so more and more companies can act.
We started with an earlier question, what is a ‘business model’? I like Alex Osterwalder’s take: “a business model describes the rationale of how an organization creates, delivers and captures value”. How does the customer proposition combine with the profit formula, the key resources and processes in a compelling way? For instance, the classic ‘bait and hook’ was popularized by a Mr Gillette – customers buy the razor holder relatively cheaply and the company makes money each time customers buy the razors. The same model is behind fountain pens, which gives us another insight – one business model can be applied to different markets with different products, and can have many strategies.
And, of course, one company can have many business models. Most of the main UK supermarkets combine Big Box retailer with online business models. Companies also evolve over time. Over the last hundred years IBM has made mainframes, PCs, and is now into services. It has lasted a hundred years because it has a purpose that transcends its current business model – packaging technology for business use.
So, what is a sustainable business model?
- First, it must be commercially successful – why is this proposition valuable to the customer and how can you deliver at a profit from it?
- Second, a sustainable business model is future ready. For instance, it will succeed in a world of rising, volatile energy and commodity prices.
- Third, it must be part of a sustainable society. It is not possible to be a sustainable business in an unsustainable economy. All business models rely on particular external conditions; to be called sustainable, those conditions must match with a thriving economy that is delivering social progress within environmental limits. For instance, does the business model enable absolute decoupling of economic growth from environmental damage? Does it rely on nature providing materials or services for free? Does it rely on unfair terms of trade? Our Vision for a Sustainable Economy, funded by Aviva Investors provides lots of detail on these conditions.
Because a business model can be executed in different ways, your strategy matters too. You must know how you will be competitive and how you will create the required conditions to be part of a sustainable society.
I know manufacturers of white goods and consumer electronics who are wrestling with how to execute a leasing business model in a sustainable way. They are finding that Radio Rentals disappeared from our high streets for a reason. Making it work commercially is not straight forward – especially when you want to execute that leasing model in the most sustainable way possible. And they are realising that a required condition is overcoming the potential stigma of renting.
For these reasons, we believe that companies will need to do two things to become leaders:
- First, experiment with business models that can be part of a sustainable society.
- Second, actively shape external conditions so the business is successful because the wider world is more sustainable.
We will all learn more about detail of what makes for a sustainable business model over the coming years. It’s going to be an exciting time.
This piece originally appeared in the Green Strategy 2011 conference green paper.